Following Donald Trump's US presidential election victory, the world waits to see which campaign promises will be delivered and which will fall by the wayside. Employers, too, can be caught out making promises to employees.

How is a contract formed?

A contract sets out, in its terms, the rights and obligations which bind the parties to the contract. Importantly, contracts do not have to be in writing to be binding but can be made orally, provided that the key principles of contract law are present, namely there must be:

  • an intention to create legal relations
  • offer and acceptance
  • consideration between the parties

These principles apply to the employment contract in the same way that they apply to any other type of commercial contract. This means that it can be easy for an employer to inadvertently create contractual terms by giving an assurance or making a promise to employees which is then binding on the employer.

Various recent cases illustrate how the Courts determine what does and does not make a contractual term.

Dresdner Kleinwort Ltd and Commerzbank AG v Attrill and others

This case was brought by employees of an investment bank in respect of their bonus entitlement. The employees claimed they had been told by the employer that they would participate in a guaranteed minimum bonus pool subject only to assessment of individual performance.

However, following the global economic crisis the bank sought to rely on the fact of a material adverse change in circumstances to reduce bonuses by up to 90%.

Both the High Court and the Court of Appeal upheld the employees' claims for their full bonus payments. In the Court's view, the information given to the employees amounted to a promise that gave rise to a contractual obligation and was not, as the employer argued, a promise that was binding in honour only. It was sufficiently certain and had been intended to create legally binding obligations.

In particular, the Court of Appeal held that the announcement, delivered by the bank's CEO at a meeting which staff were encouraged to attend, amounted to a unilateral variation of the employees' terms in accordance with the staff handbook. The announcement was designed to retain staff and prevent the potential collapse of the bank, following concerns expressed by the regulator. Staff were assured that the bonus pool was guaranteed come what may. In those circumstances, there was a strong presumption that the announcement was intended to be legally enforceable. Even if there had not been a lawful unilateral variation, there had been no requirement for employees to accept the offer, and the employees had given good consideration by remaining in employment.

The above case can, however, be contrasted with the position in the following recent cases.

Judge v Crown Leisure Limited

The employee in this case claimed that, at the firm's Christmas party in 2001, his manager promised that within two years he would put the claimant on the same salary as another colleague who earned twice the claimant's salary. The claimant subsequently resigned, claiming constructive dismissal on the grounds that his manager had broken his contractual promises made at the party. However, both the Tribunal and the Employment Appeal Tribunal rejected the claim.

In particular, it was held that the context of the conversation (that is, the Christmas party) indicated that the manager did not intend to enter into any legally binding contractual commitment to the claimant - it was simply a statement of intent rather than a guarantee.

Prometric Ltd v Cunliffe

The claimant was employed as director of human resources by Prometric's predecessor. In January 2002 he joined the company's defined contribution personal pension scheme. In March 2000 the company was taken over by the Thomson Corporation and the claimant joined that company's defined benefit scheme. Prometric was then sold in 2007 and from that time the claimant was treated as being part of the company's defined contribution scheme.

The claimant brought proceedings for breach of contract, claiming that he had a contractual right to continue to be treated as a member of a defined benefits scheme. He argued that during a conversation with the international HR director in March 2000 he was told that he would from then on be a member of the Thomson defined benefits scheme.

However, the Court of Appeal struck out the claim, dismissing the suggestion that, on subjects as complicated as pensions, senior managers would enter into oral agreements which are not then followed up in writing. This was particularly so where the conversation was between two human resources executives who must have been well aware of the need to document any agreement on a pension.

What can employers learn from these cases?

The above cases should not be interpreted as meaning that things said at company or other social events, or off hand comments, cannot be intended to create legally binding commitments; every case will turn on its own facts. However, some general principles can be distilled:

  • Whether a promise made by a representative of an employer is sufficient to give rise to a contractual obligation will depend on the intention behind it; is it merely a statement of intent or a guarantee?
  • Words of encouragement and good intentions can end up being misinterpreted so, ideally, managers should receive training on, or at the very least be reminded in writing about, the ease with which contractual commitments can be made.
  • Managers should be advised not to discuss pay or career potential outside of appropriate forums and as part of a formal process, for example, in performance development reviews where discussions are properly documented or in other formal meetings with HR present to take a note.
  • Any conversations where there is a stated intention to vary terms and conditions should always be confirmed in writing and a copy kept on the employee's HR file.
  • If a manager is concerned that a discussion may be misinterpreted they should follow up in writing to confirm that the intention was not to make a binding promise so that everyone is clear about where they stand.
  • Employers should be wary of making statements which can be interpreted as binding promises in group meetings. It may be helpful to start any such meeting with an oral 'disclaimer' explaining that the meeting is to give information but not intended to create rights and obligations.
  • Employers should consider including a clause in their standard employment contracts which makes it clear no variation of contract will be binding without following a set procedure. For example, such procedure could require written confirmation of the change in terms from the HR director. Such clauses are not always enforced by the Courts but they do provide a starting point for protection of the employer's position.